Mutual Funds Try to Calm Nervous Investors

ADVERTISEMENT

By Mark Jewell, AP Personal Finance Writer

BOSTON (AP) — Stocks are up sharply, yet the mutual fund industry is still bracing for a worst-case scenario.

A driving force behind many of this year's fund launches is fear and how investors can face up to it. More than a dozen new funds are specifically designed to protect against risks like inflation, a market crash, and excessive volatility.

But this year's crop of new funds is about more than just easing anxiety. Two top fund companies are venturing outside their comfort zones — the world's biggest bond shop is trying its hand at stock-picking, and a star stock picker is venturing into bonds.

Nearly 7,700 mutual funds already compete for your investment dollars, so make sure a new fund really stands out before jumping in.

Some seize on investor interest in recently hot strategies whose days may be numbered. Plus, there's no track record to scrutinize.

"The burden of proof is definitely on a new fund to prove it's worth it," says Morningstar analyst Dan Culloton.

What's more, there aren't as many new funds as usual to choose from. Morningstar counts 56 through late April, putting launches far behind the pace of the past few years.

Here's a look at some of the year's more noteworthy launches:

INFLATION FIGHTERS: Rising prices will erode purchasing power and undercut a retirement portfolio. Or, for the fund industry, inflation can create a market opportunity. Seven new funds either have inflation in their name, or explicitly seek to limit inflation risk through investments like Treasury inflation-protected securities. Some also invest in commodities or other assets that typically fare well when consumer prices rise.

This group includes three funds from AllianceBernstein: Multi-Asset Inflation Strategy (AMTAX), Bond Inflation Strategy (ABNAX), and Municipal Bond Inflation Strategy (AUNAX). Another two are from Eaton Vance: Commodity Strategy (EACSX) and Short Term Real Return (EARRX). Others include Principal Diversified Real Asset (PRDAX) and Legg Mason Strategic Real Return (LRRAX).

Why are they launching when inflation remains near zero? It can't last.

At some point the Federal Reserve will need to start boosting historically low interest rates to head off inflation. But it must do so without putting the nascent economic recovery in jeopardy.

"We're borrowing money, we're printing money, and historically that has often led to inflation," says Tom Luster, co-manager at Eaton Vance Short Term Real Return. "For good reason, investors are worried about inflation, even if you don't see any hint of it today."

LONG AND SHORT FUNDS: There are six new "long-short" funds using defensive strategies that hedge funds have traditionally relied on to protect against steep market declines. Investing "long" is betting a stock will eventually rise. Combining that traditional approach with a "short" strategy means also trying to take advantage of stocks expected to fall. If the market crashes, an investor can still profit from those short bets.

New long-short funds include Keeley Alternative Value (KALVX); Biondo Focus Investor (BFONX); Drefyus Dynamic Alternatives (DDYAX); Thesis Flexible (TFLEX); ARQ Managed Futures Strategy (AQMIX); and Strategic Investing Long-Short (THENX).

HOLD THE VOLATILITY, PLEASE: Other new funds borrow from traditional hedge fund strategies to produce smooth returns that aren't always in synch with the market. Generally, these funds have leeway to shift among stocks, bonds, currencies and commodities. The list includes AmericaFirst Absolute Return (ABRFX) and Goldman Sachs Dynamic Allocation (GDAFX).

PIMCO TAKES STOCK: Pimco is synonymous with bonds because of its legendary co-founder Bill Gross and the $220 billion in its Total Return fund, the world's largest mutual fund.

The bulk of the $1 trillion that Pimco manages is in fixed income, a good place to be lately. For 27 consecutive months, investors have put more money in bond funds than stock funds, according to Morningstar.

So why has Pimco just launched Pimco EqS Pathfinder (PATHX), the first actively managed stock fund in the company's 39-year history?
Pimco wants to give investors access to virtually the entire universe of assets, including stocks of both U.S. and foreign companies. That's according to Neel Kashkari, who joined Pimco in December after heading the U.S. Treasury's $700 billion bank rescue effort. Now, he's designing Pimco's strategy to launch a series of stock funds, which will invest globally.

"We made a strategic decision that the U.S. equity mutual fund space is very crowded, markets are very competitive, and it's been very difficult for U.S.-only managers to consistently beat the market," Kashkari says. "So we're not going there."

EqS Pathfinder's managers are Anne Gudefin and Charles Lahr. Pimco hired them away from Franklin Templeton, where they co-managed the top-performing Franklin Mutual Global Discovery (TEDIX). The new Pimco fund will also focus on both foreign and domestic stocks, emphasizing those considered cheap relative to their earnings.

Morningstar fund analyst Bridget Hughes says Pimco's hiring of Gudefin and Lahr illustrates the company's ability to draw top investing talent for its stock fund initiative.

STAR MANAGER BRANCHES OUT: Bruce Berkowitz's success at Fairholme Fund (FAIRX) won him Morningstar's "Domestic-Stock Fund Manager of the Decade" title in January. Now, he's using his stock-picking reputation as a springboard into bonds. He's simultaneously managing Focused Income (FOCIX), which launched in January. The fund will hold just 15 to 50 bonds, including those of companies in which Berkowitz' other fund makes stock investments. Many fixed-income funds hold hundreds of bonds, so Focused Income's strategy could invite higher risk if one or more issuers default. It also could mean outsized returns if the fund's concentrated portfolio really takes off.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

Show Comments

Back to Top